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Reserve Bank Interest Rate Annoucement April

Reserve Bank Interest Rate Annoucement April

The Reserve Bank of Australia (RBA) left the cash rate on hold at 3 percent at its board meeting today, marking the fourth consecutive meeting with no rate movement.

Commenting on the decision RateCity chief executive, Alex Parsons, said there are signs to suggest the falling interest rate environment was in the past.

“One of the barometers of interest rate directions is fixed home loan rates and while we are still seeing some fixed rates falling, the decent has slowed significantly, which could be a sign that lenders are expecting funding pressures to stabilise or lift in the near future,” he said.

“For instance, the average three-year fixed rate fell by 0.56 percentage points in the six months to October 2012, and in the past months it fell by 0.36 percentage points, according to RateCity’s database of more than 100 lenders.”

The RBA began lowering the cash rate in November 2011 and as a result, repayments on the average sized home loan of $300,000 have been reduced by $266 per month.

But historically low variable rates may not remain low, and some analysts are forecasting rate hikes as early as this year. So borrowers are being urged to prepare now to avoid the financial shock of higher repayments.

Many Australians are already doing this. The Reserve Bank reports that households are more prudent about spending compared to pre-GFC, with some taking advantage of the low rates by saving a mortgage buffer.

“It’s great to hear that households have saved an equivalent of 20 months of mortgage repayments (in aggregate) since rates began to fall in November 2011, according to the Reserve Bank,” he said. “But there would be many borrowers that haven’t kept their repayments higher and have grown used to more money in their pocket.”

 “A great way to reduce the impact of higher interest rates is to use RateCity.com.au to compare your home loan to the rest of the market and renegotiate with your existing lender or switch to a better deal.”

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.